Fonterra is likely to write off its remaining $62 million stake in troubled Chinese dairy company San Lu.
Chief executive Andrew Ferrier said yesterday no agreement had been reached over the sale of its San Lu assets, but it appeared that any revenue from a sale would match its liabilities, built up in part as a result of September's melamine toxin posioning which killed three children and hospitalised more than 50,000 others. More than 1000 children were still in hospital with kidney damage.
It has already written off $139 million of that investment.
"As a result, it is increasingly likely that Fonterra will have to write off the balance of its investment and this had been taken in to account in the latest payout forecast," Mr Ferrier said.
The dairy co-operative has revised down its expected payout this season from $6.60 a kg of milksolids (kg/ms) to $6 on the back of plummeting international commodity prices.
Chairman Henry van der Heyden said yesterday international commodity prices had fallen 24% in the last eight weeks.
Fonterra has been in China for 20 years, exporting about $200 million a year of products for the ingredients and food service sectors.
It bought a 43% stake in San Lu in 2006 to have a presence in the consumer business. If it exits San Lu, it would still retain its ingredients and food service business.
It entered the Chinese consumer business with much fan-fare which also gave its global expansion strategy a huge boost.
The move was viewed as a blueprint for that strategy, in which Fonterra took a stake in a local dairy company to get access to fresh milk and a slice of the domestic consumer dairy market.
Fonterra would then use its expertise to develop that business.
China's consumer market was particularly enticing, with liquid sales growing at 34% a year but with huge potential to grow further.
Exiting the Chinese consumer dairy business would be a set back for Fonterra, but sources say such a decision would not mean an end to the global expansion strategy.
Shareholders would get a better indication of any change to that strategy at next week's annual meeting at which the board will present its three-year business plan.
That meeting will be followed by meetings with shareholders around the country.
• China has announced a complete overhaul of its dairy industry to improve safety at every step - from cow breeding to milk sales - saying its worst food quality scandal in years had revealed "major problems", the Associated Press has reported.
The State Council, China's Cabinet, said the Health Ministry will issue new quality and safety standards for dairy products, while the Agriculture Ministry will draft inspection standards for melamine and other toxins in animal feed. The flow and delivery of dairy products will also be tracked, it said.
